The current price of a stock is $145, and three-month European call options with a strike price of $149 currently sell for $6.40. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 1,600 call options. Both strategies involve an investment of $14,500.

1. If the share price increases to $162, what will the gain to the investor be if he bought call options?
2. If the share price increases to $162, what will the gain to the investor be if he bought shares?
3. It is therefore advisable for the investor to buy _________( answer) in order to benefit from an increase in the share price.
4. For both the strategies to be equally profitable the stock price should increase to _____ ( answer).

Answer rating: 100% (QA)

The value of a call option upon maturity is calculated as the di... View the full answer